Oil rises after G-7 calms currency war rhetoric

Shots Fired

The G-7 and Eurozone finance minters supposedly were on target for a cease fire in the so called currency war, but the rhetoric yesterday seemed to shake up the falling crude market as an ECB bank official took aim and fired. Oh sure now things are calming down after a Group of Seven statement that said that they would not target exchange rates but that did not seem to cover up the drama and tensions that is obviously going on behind the scenes ever since Japan’s loose monetary policy caused a collapses in the yen.

Oil reversed course on a Bloomberg report that said that ECB council member Jens Weidmann said the euro isn’t seriously overvalued and warned governments against trying to weaken the currency. “Latest indicators don’t signal a serious overvaluation of the euro despite its recent appreciation” and “politicians should hold on to the established division of labor,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Freiburg today. “An exchange-rate policy to specifically weaken the euro would lead to higher inflation in the end.” Of Course that defiant statement was different from what the French were suggesting and changed the topping action in oil as a strong euro means a strong price for oil.

“We reaffirm that our fiscal and monetary policies have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the Group of Seven’s finance ministers and central bank governors said in a statement released today in London. The market was assuming that we would see at least backing off of the euro surge, which would have helped the dollar and bring down the price of oil. Yet based on talk by the G-7 that all is well in the world of exchange rates, it appears the currencies can go on the same happy trend that the central bankers want them to go.

Bloomberg reported French President Francois Hollande last week urged government leaders to steer the value of the euro lower to boost growth. His call was rebuffed by German Chancellor Angela Merkel’s government and European Central Bank President Mario Draghi, who on Feb. 7 suggested the European Central Bank, could lower interest rates if the stronger euro were to damp inflation too much. Yet with Europe meeting in Brussels and the G-7 taking neutral stand oil is finding new life riding on the backs of the strength in the euro.

OPEC apparently is not very happy with the fact that the U.S. is blowing them away with production increases. Dow Jones is reporting that the Organization of Petroleum Exporting Countries Tuesday warned that expectations of growth in non-OPEC oil supply this year — seen as essential to meeting global oil demand in the long term — were subject to a high level of risk, particularly in the U.S. They say that strong growth in U.S. oil output in recent years as a result of technologies that have made it possible to release large reserves of oil trapped in shale rock has taken many by surprise and started a shift in global trading patterns that could threaten OPEC's dominance of the oil market.

In a landmark study this October, the International Energy Agency predicted U.S. oil output could, by 2020, overtake that of OPEC's kingpin, Saudi Arabia. According to the IEA's forecast the increase in U.S. output will force OPEC members to adapt rapidly to changing trade patterns, and potentially even put them in competition with North American oil exports. OPEC's response to this development has so far been muddled. The group initially said it wasn't concerned by the shale-oil boom, but later warned forecasts of rising U.S. oil production could curtail its own investment to maintain output.

Dow said that most recently, in its monthly oil market report published Tuesday, the group warned of the many stumbling blocks that could prevent U.S. oil production from meeting expectations, at least in the near term. Although the group of major oil producers forecast the shale boom in the U.S. would help increase oil production by 520,000 barrels a day this year, making the U.S. the region with the highest production growth among the non-OPEC countries, it also warned of the challenges facing the industry. "A high level of risk is associated with non-OPEC supply forecasts on political, price, economic, weather, environmental and geological factors," the report said.

Bloomberg reported that OPEC raised forecasts for the amount of crude it will need to supply this year because of stronger fuel demand in emerging economies. OPEC will have to provide an average of 29.8 million barrels a day in 2013, or 100,000 a day more than it estimated a month ago. The producer group’s output in January was 500,000 barrels a day larger than this, at 30.3 million, according to OPEC’s monthly market report published today. The group projected U.S. production would rise from 10.42 million barrels a day in the first quarter of this year to 10.6 million barrels a day in the fourth quarter. Overall, OPEC forecast that non-OPEC supply would increase by 940,000 barrels a day this year to 53.9 million barrels a day, driven primarily by growth in the U.S., Canada, Latin America and the former Soviet Union. The group said that it expected demand for its own crude to fall by 300,000 barrels a day in 2013 compared to last year.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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